Finance Q&A with Derek Mackay

Derek Mackay, Cabinet Secretary for Finance and the Constitution, on Scotland's financial situation

Derek Mackay: Picture credit - David Anderson

You have said that Scotland’s economy is suffering from the reality of the Brexit vote. What are you doing to mitigate that?

The fundamentals of Scotland’s economy remain strong and, although we still face a number of challenges – not least the threat of a ‘hard Brexit’ – it’s encouraging to see that Scotland’s unemployment rate is at a record low, the productivity gap with the UK is closing, and we achieved a record-breaking year for Foreign Direct Investment projects in Scotland in 2016.

We are going to continue to use all of the powers at our disposal to grow the economy, including our multi billion-pound infrastructure plan – transforming business and skills support – and our £500 million Scottish Growth Scheme. That’s on top of the £100 million we announced last year as part of the Capital Acceleration Programme – intended to further stimulate the economy.

And we’ve also introduced our Small Business Bonus Scheme – saving tens of thousands of businesses an estimated £1.3 billion. In spite of this, the threat of Brexit – which Scotland voted overwhelmingly against – is the most significant threat to Scottish jobs, investment and living standards. A hard Brexit, as advocated by the UK Government, which takes us outside of the world’s biggest single market, would clearly be enormously damaging to businesses. Along with my fellow ministers, we are doing everything we can to mitigate against these impacts, and to ensure that Scotland still has a choice in its future at the end of the Brexit process, once the terms of the deal are known.

Can you see any opportunities for Scotland from Brexit?

Brexit presents a number of significant challenges, and very few opportunities. Despite this, we are doing what we can to protect Scotland’s interests at home and in Europe.

Clearly the slump in North Sea oil and gas has badly affected Scotland, can you see any glimmers of hope for that industry and what can be done to help?

Although there are undoubtedly big challenges for that sector, there are strong grounds for optimism as well. In the last few months, we’ve seen a number of significant oil fields start production, which has coincided with a pick-up in corporate activity, amidst evidence from business surveys of increasing confidence in the sector. That’s been reflected in the recent 0.8 per cent growth in the Scottish economy in the first quarter of 2017 – which is four times that of the UK rate. We’ve also seen a rise in output industries linked to the North Sea for the first time since 2014, and a recent surge in recruitment announcements by the industry. With up to 20 billion barrels of oil and gas remaining, it’s clear that the North Sea has a bright future.

The SNP has come in for criticism for not using the new powers over taxation to introduce the 50p tax rate. How can you justify this when it is something you previously campaigned for?

The Scottish Government is committed to ensuring Scotland is a country that businesses and people want to locate, live, and work in, both through preserving a competitive, progressive tax environment but also providing good quality public services. Where we have the powers to do so, we are making taxation fairer and more proportionate to the ability to pay, while also raising additional revenue. Our income tax proposals for 2017/18 and beyond will protect lower income taxpayers – but also generate extra revenue of £107 million this year to invest in public services. Our Council of Economic Advisers are also reviewing whether a 50p tax rate could be introduced in 2018/19, but before any such measure could be introduced, we would have to be sufficiently assured that raising the additional rate from 45p to 50p would not be a risk to Scottish tax revenues.

We have strong foundations to build upon: Scotland has a wealthy and productive economy with strong economic foundations. We have substantial natural resources, a longstanding reputation for innovation, and internationally recognised brands and companies competing successfully in global markets. We also have a strong track record of attracting the companies that will create top jobs and, in each of the past five years, we have attracted more Foreign Direct Investment (FDI) projects than anywhere in the UK outside of London. And last year we attracted more research and development FDI projects than anywhere else in the UK.

All of which is complemented by Scotland being home to some of the world’s top universities, which not only offer the highest level of education for Scottish students, but also attract top talent from across the globe. Not to mention that Scotland regularly comes out top in surveys for having the best quality of life in the UK – taking into account factors like health, safety, access to education, and individual rights. And with the attraction of a narrow (and increasingly narrowing) gender pay gap, dozens of business loans and grant programmes for entrepreneurs, and some of the finest natural environment in the world, it’s no wonder that Scotland is [top in surveys].

The one new tax that you have introduced, the Land and Property Transaction Tax, now looks as if it will require to be reworked. How did you get the forecasts so wrong?

As the OBR has stated, property transactions tax is one of the most volatile taxes, so forecasting revenues precisely each year is very difficult. OBR forecast errors in relation to SDLT have been of a similar magnitude to Scottish Government forecasts for LBTT. To quote OBR’s exact words on the difficulties of forecasting: “Stamp Duty Land Tax (SDLT) is one of the more volatile sources of receipts… in line with that, we have revised SDLT forecasts proportionally more than for any other major tax.” Over a longer period, our forecasts for LBTT have not been far from accurate. As I said in Parliament on 22 June in the debate on the Provisional Outturn, the aggregate forecast for LBTT over two years was £919 million while the actual outturn was £909 million, which is a variance of 1 per cent. The Land and Property Transaction Tax (LBTT) is more progressive than the equivalent tax in the rest of the UK - Stamp Duty Land Tax. This means 93 per cent of taxpayers in Scotland are paying the same or less than they were under Stamp Duty Land Tax. Our LBTT forecasts have been independently scrutinised and approved by the Scottish Fiscal Commission. Economic forecasts are revised continually in the light of new data, so revisions to forecasts are nothing new in Scotland or the UK.

As a former council leader, how difficult was it to face such vitriolic criticism from council leaders about the budget allocation you set for local government?

The Scottish Government has treated local government very fairly, in spite of the UK Government’s significant cuts to the Scottish budget. The 2017-18 local government finance settlement, including the extra £160 million I announced on 2 February, plus the other sources of income resulting from the council tax reforms, and funding for health and social care integration, means that the overall increase in spending power to support local authority services amounts to almost £400 million, or 3.7 per cent.

Has the SNP Government simply been a conveyor belt for Tory austerity?

No, this government has long campaigned for the UK Government to reverse its austerity policies. The Scottish Government is doing everything it can to mitigate the effects of austerity, by supporting inclusive growth, investing in jobs and protecting people from the worst impacts of austerity. Since 2013-14, we have invested over £350 million to mitigate the worst impacts of the UK welfare cuts to protect those on the lowest incomes and are doing everything in our powers to encourage the UK Government to change its approach. In addition, we have taken a different approach on public sector pay and social policy.

During the election, business made it very clear that it wants no more uncertainty, do you still think that independence is the way to create a more prosperous Scotland?

Analysis shows that there is no greater threat to business in Scotland than the continuing threat of a hard Brexit. The potential costs of leaving the EU to the Scottish economy is £11.2 billion per year by 2030, and at a cost of up to 80,000 jobs over the next decade. With that in mind, we are doing everything we can to protect Scotland’s interests, and that must include independence, if it becomes clear that it is the best or only way of doing so.